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Opportunity zone

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An Opportunity Zone is a designation and investment program created by the Tax Cuts and Jobs Act of 2017 allowing for certain investments in lower income areas to have tax advantages. The purpose of this program is to put capital to work that would otherwise be locked up due to the asset holder's unwillingness to trigger a capital gains tax.[1]

History

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Opportunity Zones were proposed by Senators Tim Scott, Cory Booker, and Representatives Ron Kind, Pat Tiberi[2] and supported by Sean Parker's Economic Innovation Group.[3] States may designate up to 25% of low-income census tracts as Opportunity Zones.[3] Opportunity Zones were created under the 2017 Tax Cuts and Jobs Act, signed into law by President Donald Trump.

The first Opportunity Zones were designated in April 2018.[4] There are 8,764 Opportunity Zones in the 50 states, and five U.S. possessions, including American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and the Virgin Islands.[5]

Not all Opportunity Zones are in low income communities. Per Internal Revenue Code Section 1400Z-1(e), up to five percent of the Opportunity Zones in each state can be non-low income tracts contiguous to low-income tracts.[6] In December 2019, Treasury issued final regulatory guidance on Qualified Opportunity Fund investing.[7]

Requirements

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To qualify, the Opportunity Fund must invest more than 90% of its assets in a Qualified Opportunity Zone Property located in an Opportunity Zone.[8] The property must be original use, or meet the definition of substantial improvement, meaning that the adjusted basis in the property must be doubled after purchase.[9] Capital gain taxes are deferred for investments reinvested into investments in these zones and, if the investment is held for ten years, all capital gains on the new investment are waived. Despite the tax benefits and broad bipartisan support,[10] the Opportunity Zones policy has its critics.[3] Opportunity Zones are census tracts nominated by state authorities and certified by the IRS. A total of 8,764 census tracts have been so designated.[11]

An investor who triggers an eligible gain (including capital gains and qualified 1231 gains) may reinvest the capital gain in a Qualified Opportunity Fund within 180 days in order to receive Opportunity Zone tax benefits.[8]

Tax benefits

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There are four major tax benefits available to U.S. taxpayers who timely reinvest eligible gains into Qualified Opportunity Funds that comply with the Opportunity Zone statute and IRS regulatory guidance.[12]

  1. For tax reporting purposes, the eligible gain is deferred until December 31, 2026.
  2. The tax liability on the reinvested eligible gains is reduced, through a basis step-up of either 10 or 15 percent. Note: The 15% benefit expired after December 31, 2019. The 10% benefit expired after December 31, 2021. Investments in QOFs made after December 31, 2021 no longer receive this benefit.
  3. The tax liability resulting from the sale of the Qualified Opportunity Fund is eliminated, through a step-up to fair market value upon disposition, so long as the Qualified Opportunity Fund has been held for a period of at least 10 years.
  4. There is no depreciation recapture upon the sale of depreciated Qualified Opportunity Zone Property.

In order to report the investment to the IRS, the taxpayer needs to file IRS Form 8997 annually.[13]

Prior to the law creating Opportunity Zones, an investor could defer capital gains taxes only through a like-kind exchange, i.e., by trading one asset with another asset in the same asset class by using a Section 1031 exchange.[1][14] Opportunity Zones are similar, but there are several key differences.[15] One such difference is that an Opportunity Zone does not require a like-kind exchange. Instead, by investing in a Qualified Opportunity Fund, an investor can defer any eligible gain (either capital gains or qualified 1231 gains) arising from the transaction of a property in any asset class (e.g., stocks, privately held business, real estate, collectibles, etc.).[1][14]

See also

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References

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  1. ^ a b c Brezski, Jan. "Opportunity Zone Investment vs 1031 Exchanges". arixacapital.com/. Retrieved 15 January 2019.
  2. ^ "Booker, Wyden, Lewis, Neal Request GAO Study on Opportunity Zones | Cory Booker | U.S. Senator for New Jersey". www.booker.senate.gov. Retrieved 2020-02-06.
  3. ^ a b c Tankersley, Jim (January 29, 2018). "Tucked Into the Tax Bill, a Plan to Help Distressed America". The New York Times. Retrieved December 3, 2018.
  4. ^ "Treasury, IRS Announce First Round Of Opportunity Zones Designations For 18 States". U.S. Department of the Treasury. April 9, 2018. Retrieved December 3, 2018.
  5. ^ "Opportunity Zones by Location". OpportunityDb: The Opportunity Zones Database. Retrieved 25 January 2024.
  6. ^ "U.S. Code Title 26 Subtitle A CHAPTER 1 Subchapter Z § 1400Z–1 - Designation". Legal Information Institute. Cornell Law School. Retrieved 25 January 2024.
  7. ^ Atkinson, Jimmy (December 19, 2019). "IRS Issues Final Regulations on Opportunity Zones". OpportunityDb. Retrieved 25 January 2024.
  8. ^ a b Grassi, Carl (December 1, 2018). "Opportunity Zone program offers investors deferred gain tax benefits". Crain's Cleveland Business.
  9. ^ Baker, Matt (November 28, 2018). "The legal loopholes of Opportunity Zones". RE journals.
  10. ^ Goodman, Daniel (February 28, 2023). "Opportunity Zones in 2023: A Look Back, a Look Forward". Kiplinger. Retrieved 25 January 2024.
  11. ^ Lydia O'Neal (18 April 2019). "Cottage Industry in Opportunity Zone Data Forms to Fill Vacuum (1)". Bloomberg. Retrieved 18 April 2019.
  12. ^ Atkinson, Jimmy. "Opportunity Zone Tax Benefits: Unlimited Tax-Free Growth". OpportunityDb. Retrieved 25 January 2024.
  13. ^ "About Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments". IRS.gov. Internal Revenue Service. Retrieved 25 January 2024.
  14. ^ a b Borland, Kelsi Maree (November 27, 2018). "How Popular Will Opportunity Zones Be?". GlobeSt. ALM Media Properties, LLC.
  15. ^ Atkinson, Jimmy. "Opportunity Zones vs. 1031 Exchanges". OpportunityDb. Retrieved 25 January 2024.
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